Thursday, January 28, 2021

Healthy competition is the rule of the game


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A TEACHER once told her students that they must work hard to earn good grades and become part of top 10 of the class. She told her class that it was okay to compete with each other to get good grades as long as it was a “healthy competition,” that is, no cheating, no foul play.

In a free market, companies, or what we call “firms,” are free to determine the products to be produced and consumers are permitted to make economic decisions on what products to buy. Essential in a free market is the same “healthy competition”—i.e., no cheating, no foul play or no unfair and anti-competitive practices, as the teacher told her class.

Competition matters

In a general sense, competition maintains prices low and at the same time the quality of goods and services high. On the part of the firms, competition motivates them to offer better products and more innovation. But how does it work? In the bath and soap section of your favorite supermarket, you will notice a couple of brands of shampoo manufactured by different firms. These firms have a common objective; it is for you to purchase their shampoo among the various competing brands. As such, these firms will try their best to offer you the best possible shampoo in the market at the lowest price. Imagine if there is only one firm manufacturing shampoo, it could just raise its price and consumers will either buy shampoo at a high cost or just stop using shampoo. On part of the firm, it has no incentive to make quality and better products since people who opt to use shampoo will just buy it due to lack of choice. And this has the same effect, when two competing firms merge together in order to reduce or dilute competition in the market. In truth, in a free market, there are cheaters and unscrupulous firms engaged in conduct restraining trade and competition, such as price fixing, predatory pricing, boycotts, and allocation of territories or customers. And the effects of it may not be immediate and apparent but one thing is certain, the consumers are bound to suffer by it.

Philippine Competition Act

These are but a few anticompetitive conducts that the antitrust law or competition law tries to police and penalize. The United States has one of the oldest antitrust laws in the world. Its antitrust law, the Sherman Act, dates back to late 1800s. So, when you hear this archaic-sounding word of antitrust, it only pertains to laws crafted to protect competition in the market. The Philippines’ commitment to the Association of Southeast Asian Nations (Asean) to adopt an economy-wide competition law by the end of 2015 ended the 20-year legislative battle of bills on competition. In July 2015, the Philippine Competition Act, or Republic Act 10667, took effect. Although this novel comprehensive law on antitrust is just in its genesis, the Philippines has fragments of antitrust provisions in various legislations and in Article XII, Section 19 of the Constitution.

The Philippine Competition Act promises an enhanced efficient economy, equal distribution of wealth, and a free and fair trade competition by prohibiting conduct and combination in restraint of trade. The essential aspects of the law are identifying and defining anticompetitive conducts and agreements, merger and acquisition review, and the creation of the Philippine Competition Commission. Apart from these, the law also provides for guidance and standards in disposing cases, such as the determination of whether a conduct or an agreement is anticompetitive; it provides for the penalties and fines, remedies, and the statute of limitations.

Philippine Competition Commission

The Philippine Competition Commission (PCC) is an independent quasi-judicial body. This must not be confused with the antitrust division of the Department of Justice (DOJ) or the Office of the Competition (OFC). PCC is primarily tasked with policing anticompetitive conduct and implementing the national competition policy of the country. The PCC has the original and primary jurisdiction over the enforcement and implementation of the law, which includes, among others, conduct inquiries, investigations, hear and decide cases involving violations of the law and other existing antitrust laws. As a quasi-judicial body, the PCC has broad powers when it comes to matters of competition. This means the PCC has the power to adjudicate the rights of persons who seek remedy before it. This includes the power to investigate and determine questions of facts to which the legislative policy is to apply, hold hearings, weigh the evidence, and draw conclusions from them as basis for their official action and exercise of discretion in a judicial nature.

As such, when disputes arise, one must bear in mind the principle of primary jurisdiction. The doctrine of primary jurisdiction applies only where the administrative agency exercises its quasi-judicial or adjudicatory function.

Thus, in cases involving specialized disputes, the practice has been to refer the case to an administrative agency of special competence, in this case the PCC. The objective of the doctrine of primary jurisdiction is to guide a court in determining whether it should refrain from exercising its jurisdiction until after an administrative agency has determined some question or some aspect of some question arising in the proceeding before the court. On the other hand, the OFC under the DOJ has only the power to conduct preliminary investigation and undertake prosecution of criminal offenses arising under law or other antitrust laws. Thus, the law expressly amended Executive Order 45 that designated the Department of Justice as the competition authority.

Engaging in anticompetitive agreements is a crime

The focus of this article is the types of anticompetitive agreement under the law. Section 14 of the law proscribes and penalizes anticompetitive agreements between and among competitors. These anticompetitive agreements can be classified into two, i.e., agreements that are per se illegal (Section 14, a) and agreements that substantially preventing and restricting or lessening competition (Section 14, b). Like the Sherman Act in the US, the law makes an entity criminally liable for violating Section 14 (a) and (b). Under the law, the penalty of imprisonment, which will range from 2 to 7 years, shall be imposed upon the responsible officers, and directors of the entity.

It must be emphasized that Section 14 contemplates an “agreement” between competing firms. Generally, an agreement contemplates a contract, i.e., a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service. But agreement under the law has a technical meaning as it refers to any type or form of contract, arrangement, understanding, collective recommendation, or concerted action, whether formal or informal, explicit or tacit, written or oral. On the aspect of competing firms, it requires you to determine the relevant market and the relevant product market. Basically, this contemplates goods and services which are regarded as interchangeable or substitutable by the consumer in consideration of its characteristics, prices, and intended use. Thus, in the market of leather bags, Secosana leather bag cannot be considered a competitor of Louis Vuitton leather bag because these are not interchangeable products as opposed to Colgate and Close up, in the market of toothpaste.

Per se illegal agreements

In the US, when antitrust suits are litigated, the courts are confronted with the two methods of analyzing conduct under the Sherman Act—rule of reason and per se rule. This means agreements that are so patently anticompetitive should be summarily condemned without giving a defendant the opportunity to prove that a restraint may have procompetitive purposes. Per se violations include those types of restraints on competition that are in and of themselves considered unreasonable because “their pernicious effect on competition and lack of any redeeming virtue are conclusively presumed to be unreasonable.” By analogy, could the legislature intend Section 14 (a) as a malumprohibitum offense?

These are the per se prohibited agreements under Section 14 (a): 1)
restricting competition as to price, or components thereof, or other terms of trade; and 2) fixing the price at an auction or in any form of bidding, including cover bidding, bid suppression, bid rotation and market allocation and other analogous practices of bid manipulation. To illustrate, an arrangement among major oil producers to “allocate” gasoline demand is a combination formed for purpose and with the effect of raising, depressing, fixing, pegging the price of a commodity. The US court held that this illegal per se. Another instance that can be considered per se illegal is horizontal group boycotts, where a group of competitors threatened to withhold business from third parties unless those third parties would help them injure their directly competing rivals.

Agreements subject to the rule of reason

Section 14 (b) penalizes other anticompetitive agreements whose “object or effect of substantially preventing, restricting or lessening competition”. These include, 1) setting, limiting, or controlling production, markets, technical development, or investment; and 2) dividing or sharing the market, whether by volume of sales or purchases, territory, type of goods or services, buyers or sellers or any other means. Applying the US framework, the other agreements falling under subdivision b are agreements subject to rule of reason. The PCC also made mention of the application of rule of reason to the “other agreements”.

The rule of reason analysis requires the court to look deeper and weigh all relevant circumstances of each case to determine whether a restraint is legal. At its core, the rule of reason asks whether, on balance, the restraint is good or bad for competition. As such, alternative and economic effects are considered in order to justify the seeming anticompetitive effects of the agreement; courts will often study and consider the nature of the market.

To illustrate Section 14 (b), competitors A and B are producers of widget and sell their product nationwide. A and B agree that A will do business in Luzon and B will do business in the Visayas and Mindanao. A and B did not agree as to the price, amount of goods to be produced but agreed that they will not enter each other’s geographical market. This is what we call market division agreements. Although in US this is a per se illegal, under the Philippine competition law, it might fall under the category of dividing and sharing market under Section 14(b). However, one might think that it is an agreement that definitely restricts competition as to price, or components thereof, or other terms of trade, thus, per se illegal under Section 14(a).

Coming up with these two modes of analysis did not draw a bright-line rule between agreements falling under rule of reason or per se rule. In fact, to date, the US courts continue to struggle in the application of these analyses. And it is my hope that the Philippine Supreme Court will not go through the same fate.

Other anticompetitive conduct

Anticompetitive agreements between and among the competitors are not only the prohibited acts under the law. A single firm may be liable under the law for abusing its dominant position that would substantially prevent, restrict, or lessen competition through exclusionary conducts or practices. Dominant position presupposes a firm having a market power in a relevant market, i.e., the ability of a firm to increase price and limit its output without regard to how the other competing firms will react. What is prohibited under the law is that the willful acquisition or maintenance of that power through anticompetitive means as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident. Predatory pricing is one kind of exclusionary practices proscribed under the law.

Predatory pricing is a complex subject matter that requires in-depth economic analysis, but the general idea is that, it involves a two-step process: 1) dominant firm will price its good below cost, and 2) dominant firm enjoys monopoly power and raises its prices above to recoup its earlier costs. Firms will seldom venture out on this one because it is risky and expensive. Why would dominant firm underprice its product? By dramatically selling their goods below their cost, its goods will be more appealing and saleable to consumers, which in the long run will drive smaller firms out of the market or will be marginalized so they no longer count as a competitor. The predator firm would at first sacrifice short-run profits in the hopes of driving the competitors away, and thereafter, recover costs of predation through recoupment once it achieves monopoly.

Antitrust laws will just keep on evolving to adapt to the complex market and business transactions that people shape and get intertwined into everyday. There are so many things to learn and discover under the law. But the challenge now is how to put this law into action. Whether it be in classroom or market, in competition there is always a motivation to outdo competitors and be the best—be the winner. But, in order to win, firms often engage in certain business strategies and practices that cheat others and hurt competition. Like in any other competition, being the winner is the objective, but one must achieve it on the merits of its work and under the set of rules and regulations, that is what healthy competition is all about.

For now, I want to empower consumers and small rival firms to be vigilant against the business practices and strategies of competing firms that consider anticompetitive conduct as the rule of the game, rather than an illegal or prohibited conduct that should be avoided.

The author is a senior partner at the Estrada & Aquino Law firm. She is currently completing her Master of Laws (LL.M) in Global Business Law at the University of Washington of School of Law, Seattle, USA.

Terese Ray Anne O. Aquino



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